EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

Public-Private Partnerships:The Tax Aspects of Government Building Public-Private Facility Partnerships

Many municipalities are in dire financial straits and do not have
the budget capacity to maintain their physical facilities. Likewise,
the building construction and retrofit industry needs projects and
jobs. Simultaneously, the financial industry sector is seeking new
investments that have better economic returns. The convergence of
all these needs and opportunities is increasingly resulting in
solutions involving Public-Private Partnerships (PPP’s). As a result
of the Energy Policy Act, the construction and retrofit industry is
much more familiar with and supportive of government building energy
reduction-related tax incentives.

Code Section 179D EPAct Tax Opportunities

Pursuant to Energy Policy Act (EPAct) Code Sec. 179D, as enacted by
EPAct, commercial property owners or primary designers in government
projects making qualifying energy-reducing investments in their new
or existing locations can obtain immediate tax deductions of up to
$1.80 per square foot.

If the building project does not qualify for the maximum
$1.80-per-square-foot immediate tax deduction, there are tax
deductions of up to $0.60 per square foot for each of the three
major building subsystems: lighting, HVAC (heating, ventilating, and
air conditioning) and the building envelope. The building envelope
is every item on the building’s exterior perimeter that touches the
outside world including roof, walls, insulation, doors, windows and
foundation.

The Tax Opportunity

The Section 179D government building designer incentive has been a
resounding success . On September 21, 2012, Senators Snowe, Cardin,
Bingham, and Feinstein introduced a proposal to extend the current
law and also include an additional "deep retrofit" provision. The
tax benefits for Section 179D would increase from $1.80 to $3.00 per
sq. ft. and the deep retrofit provision, Section 179F, would provide
up to $4.00 per sq. ft.

Public-Private Partnerships Defined

A Public-Private Partnership (PPP) is an agreement/contract between
a public agency and a private entity. This agreement involves shared
resources, risks, and benefits involved while providing a service or
facility to the public.

Public-Private Partnership Examples

PPPs have been utilized for many years, typically for bridge
building and other major infrastructure projects.

Yonkers

A September 6, 2012 Wall Street Journal article described efforts by
Yonkers, New York, to raise 1.7 billion dollars to repair the city’s
public school systems. Yonkers is seeking investors to pay for
improvements and maintenance over thirty years. The article
indicates that many of the municipalities, including the Maryland
Public School Constitution Authority, are closely watching the
Yonkers initiative.

Chicago’s 7.2 Billion Dollar Building Program

Chicago Mayor Rahm Emanuel has announced a major 7.2 billion dollar
infrastructure improvement and municipal building energy reduction
initiative. The City of Chicago is commencing a project to retrofit
their buildings and infrastructure through the creation of the
Chicago Initiative Trust. This project allows the city to raise both
public and private capital funding of about $1.7 billion without
dipping into tax revenue. The entire project, called “Building a New
Chicago,” will cost about $7.2 billion and attempts to fix a large
portion of Chicago’s aging infrastructure, ranging from sewers to
roads to airports. More specifically,

•More than 100 Chicago Transit Authority stations, Chicago’s rail
system, will be repaired.
•$1.1 billion will be spent on the infrastructure educational
improvements.
•$1.4 billion will be spent improving Chicago’s O’Hare International
Airport. Airports are of particular interest due to their ability to
create a local economy around the airport itself.
•In addition, $250 million has been already allocated to “Retrofit
Chicago,” with the goal of transforming the Chicago owned buildings
into energy efficient models for other municipalities in the United
States to follow.

Non U.S. PPP Expertise

Large multi-national construction companies headquartered in Europe
and Australia have much more experience with public-private
partnerships and have purchased major U.S. construction and
engineering firms to pursue U.S. PPP projects. Leading non U.S.
companies already familiar with this process include Lend Lease
Corporation of Australia, Balfour Beatty of the U.K., and Ferrovial
and ACS Group of Spain. These companies need large projects to
sustain growth; new U.S. PPP opportunities are tailor made for them.

The Current State of Affairs

Municipal Financial Environment

Municipal finance has been damaged from declining revenues related
to the subprime crisis and escalating costs related to employee
benefits particularly retiree benefits.

Municipal Bankruptcies

Recently, multiple major municipalities have actually gone bankrupt
including Birmingham, Alabama, Central Falls, Rhode Island, and
Stockton, California. A September 21, 2012 New York Times article
stated that California’s state debt may be higher than previously
estimated, and may range from $167 billion to $335 billion. This
means that private investors do have to manage risk in
public-private partnerships.

Construction Industry Employment

A large portion of U.S. sustained high unemployment rates relates to
unemployed construction workers. During the economic recession, new
commercial construction has come to a screeching halt. Municipal
facility renovations require large numbers of electricians, HVAC
mechanics, carpenter, roofers and other construction trades.

Financial Industry

The financial industry is adversely impacted by a sustained low
interest environment. Commercial banks, insurance companies and even
hedge funds are recognizing the above average economic returns
potentially available from energy efficient retrofits.

Conclusion

Strong common interests can result in excellent partnerships.
Increasingly public building owners, the retrofit community and the
financial industry have some common needs. Private partnerships can
be challenging business transactions and public-private partnerships
can be even more challenging since the government mission involves
more than profit making. The large tax incentives potentially
available with these projects can help mitigate the core
profit/nonprofit organizational mission differences.